Investments Ch 2 Flashcards
Units of ownership of a corporation. Owners typically are entitled to vote on the selection of directors and other important matters. They may receive dividends. It is the most junior security.
Common stock
________ refers to the market value of the company.
Capitalization
______ are the companies with market values exceeding 10 billion.
Large cap stocks
_______ range between 10 billion and 2 billion.
Mid cap stocks
______ stocks or anything less than 2 billion.
Small cap
_________ generally reflects companies with market values less than 300 million.
Micro cap stocks
Quarterly reports from corporate management to the SEC
10Qs
Annual reports from corporate management to the SEC
10Ks
A _______ is a preliminary prospectus.
Red herring
A _______ is for potential buyers of a new issue.
Prospectus
Hybrid security that resembles both equity and debt. Typically issued at $25 par or $100 par with a stated dividend rate. Pays a fixed dividend rate because it is often perpetual, its duration is normally infinite. Does not “mature”.
Preferred stock
When interest rates change, price, fluctuations in preferred stock often ______ those of bonds.
Exceed
Preferred stock
When dividend payments are missed, ________ shares will pay all dividends in full before any payment of dividends to common stockholders is allowed. With ________ shares, missed dividends, do not have to be made up.
Cumulative/non-cumulative
What type of entity is most likely to buy preferred stock?
Regular C corporations because they can take advantage of the 50% or more dividend exclusion from taxation.
For preferred stock that pays annual dividends, if those dividends are to be “qualified” the stockholder must own the stock for _______ days in 181 day period that begins 90 days before the ex dividend date
90
Receipts, for the shares of a foreign based corporation held in the vault of a US Bank. They entitle the shareholder to all dividends. Prices are quoted in US dollars and dividends are paid in US dollars but declared in the currency of the country of origin.
American depository receipts
True or false
ADR holders may receive foreign tax credits for income tax paid to a foreign country.
True
If the dividend distributed by the foreign or incurs tax to the foreign government, a US investor may generally receive a corresponding tax credit.
A security, representing a basket or index of stocks or bonds. May operate as an open end or closed-end fund, traded on a stock exchange. Generally more tax efficient than traditional open and mutual funds.
Exchange traded funds ETFs
Can be bought and sold during the trading day. Marketable. Non-liquid (subject to market risk). Impose no sales load, but brokerage commissions generally apply. can trade at a premium or discount from its net asset value although arbitrage tends to keep the Price close to its NAV.
ETFs
An investment company with no day-to-day portfolio management. Typically an unmanaged security portfolio created by a sponsor and handled by an independent trustee. It is a passive investment as it’s assets are not traded, but frozen it collects income, and eventually repayment of principal. It is self liquidating, because as the funds are received, they are not reinvested, but are distributed to unit holders sponsor makes a market for investor, selling units and buyers of “used“ units. The units are generally redeemed at NAV.
Unit investment trust
UIT
Open end investment companies. Continue to sell shares to investors after the initial offering that starts the fund. The capitalization of an open end investment company is continually changing as new investors by additional shares, and other current shareholders redeem shares back to the company. The shares are nonnegotiable, redeemable securities.
Mutual funds
These funds issue stock once, then the books are “closed“. No new shares or issued. The shares then trade on an exchange and valued like any other negotiable security.
Closed-end investment companies
Fund investing in securities offering maximum appreciation
Aggressive growth
Fund that invest in both stocks and bonds for both appreciation and income, but not necessarily at a 50-50 allocation.
Balanced
Fund that invest insecurities offering potentially rising share price. Dividends are less important.
Growth
Fund that invest in equity securities and seeks dividend income value
Growth and income
Fund that invest in securities, traded worldwide, including US issues
Global equity
Funds that invest in securities of companies located only outside the US
International
Fund that invest in bonds of US based companies
Corporate bond
Fund that invest in mortgage backed securities
GNMA
Fund that invests in non-investment grade corporate bonds (B B, or lower) for greater potential interest income
High yield
Fund that invests in bonds issued by states and other municipalities
Municipal bond
Fund that invests insecurities, in particular sectors, such as technology.
Specialty
_______ Invest in stocks and or bonds that are components of various indexes and that emphasize tax efficiency through minimal portfolio turnover
Index funds
S & P 500, Wilshire 5000, Russell, 2000
Have open end capitalization and are redeemable.
Open end fund, mutual funds, closed-end fund companies, UITs, and variable annuities are regulated under the ______.
Investment company act of 1940
An aggressively managed investment portfolio that uses advanced strategies, such as leveraging, long, short, and derivative positions in both domestic and international markets. It’s goal is to generate high returns in both bull and bear markets.
Hedge funds
Typically operate as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment, which is illiquid as they often require the investors to keep their money in the fund for at least one year. Not highly regulated, because they cater to sophisticated investors.
Hedge funds
Similar to CDs issued by commercial banks, but they are issued by insurance companies. Terms range from 2 to 5 years and bear a guaranteed rate of interest. The value does not fluctuate with the interest-rate, but depends on the financial strength of the issuer.
Guaranteed investment contract contracts
GIC s
A passive investment. Cannot generate income or depreciation. It’s return as potential Price appreciation. It can produce negative cash flow due to insurance, upkeep, etc..
Unimproved land
Typically generates income from rentals. Include residential rental, commercial, and industrial properties. The intrinsic value of a real estate property can be computed using a net operating income computation.
Improved land
Net operating income computation
Gross rental receipts
+ __________
= Potential gross income
- _____________
= Effective gross income
- ________
= net operating income
Non-rental income
Vacancy and collection losses
Operating expenses
Once net operating income has been computed, it must be divided by the ________ to arrive at the property’s intrinsic value.
Capitalization rate
Depreciation, amortization, and debt service ______ factor in to compute net operating income.
Are not
Similar to a closed and investment company, invests in real estate, short-term construction loans, and mortgages.
Real estate investment trust
R EIT
Invest mainly an income producing properties, such as office, buildings, hotels, shopping centers, etc. and then lease the property to others. Typically use a modest amount of leverage to finance the property purchases.
Equity REITs
Make loans to develop property or finance construction. Particularly vulnerable to purchasing power risk.
Mortgage REITs
________ REITs generally pay out at least 90% of their Net Investment Income.
Both Equity and Mortgage
_______ REIT income is derived from the difference between net rental income and interest paid on the loans to acquire the properties.
Equity
__________ REIT income comes from the spread between the lending rate and the borrowing rate.
Mortgage
REITs are prohibited from investing in ____________.
Limited partnerships, which are often tax shelters
Subject to passive loss rules.
Generally not marketable.
Managed by a general partner.
Invested in real estate.
Popular in early 80s.
Real Estate Limited Partnerships
Limited-life, self-liquidating entity that invests exclusively in real estate mortgages or in securities backed by real mortgages. Issuers can separate mortgage pools into different maturity and risk classes. Represent a range of risk levels.
Real Estate Mortgage Investment Conduits (REMICs)
May eventually replace CMOs
If a REMIC is established as a corporation, its income is taxed ________.
As pass-through income (unique REMIC rules)
